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U.S. Securities and Exchange Commission

SEC Proposes Naked Short Selling Anti-Fraud Rule


SEC Chairman Christopher Cox speaking
Chairman Cox Discusses Proposed Steps to Safeguard Investors:
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Washington, D.C., March 7, 2008 - The Securities and Exchange Commission has proposed to take additional steps to better safeguard investors and protect the integrity of the markets during short selling transactions by proposing a rule that would specify that abusive "naked" short selling is a fraud.

In a naked short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period for trades. As a result, the seller fails to deliver stock to the buyer when delivery is due. This is known as a "failure to deliver." Sellers sometimes intentionally fail to deliver securities to the buyer as part of a scheme to manipulate the price of a security, or possibly to avoid borrowing costs associated with short sales.

"This rule proposal will help protect and enhance the operation, integrity and stability of the markets in the clearance and settlement system, and also puts market participants on notice that the Commission will continue targeting abuses in this area," said Erik Sirri, Director of the SEC's Division of Trading and Markets.

The Commission voted unanimously on March 4 to propose a new rule, Rule 10b-21, that would highlight the specific liability of parties who deceive others, such as broker-dealers and purchasers, about their intention or ability to deliver securities in time for settlement and that fail to deliver securities by settlement date.

The comment period for the proposal will end 60 days from the date of publication of the proposed rule in the Federal Register.

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The full text of the proposing release will be posted to the SEC Web site as soon as possible.

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Modified: 03/07/2008